Two words which, when used frequently by an individual up until four months ago, would have earned him the label of an ‘over thinker’, a ‘daydreamer’ or a ‘pessimist’.
The COVID-19 pandemic outbreak has turned the world on its head, and so has the importance of these two words.
What used to be a regularly used simple phrase, possibly going unnoticed, has now become a trigger for a variety of emotions ranging from hope to reassurance or perhaps fear.
What if this virus loses strength and vanishes abruptly, as happened with SARS?
What if this virus turns out to be seasonal and a stronger wave of infections is experienced again in autumn?
What if the development of a vaccine takes longer than expected?
What if the virus has been running undetected in the community for months, is over-estimated and the ensuing economic measures taken unjustified?
I am definitively not suitable to give a qualified opinion on health issues and will be focusing on some possible implications of these scenarios on economic data and investment markets.
As the COVID-19 outbreak’s epicentre moved from China to Europe and subsequently to the US, different sectors in the respective economies started taking the hit. The latter was worsened further with the implementation of strict lockdown measures. The globalised world we live in and the interdependence between countries and continents exacerbated this.
The euro area registered a negative growth rate of -3.8 per cent for the first three months of the year, while US data indicated a five per cent slump.
Despite not ending the quarter in negative territory, Malta also experienced a significant slowdown in GDP growth. Needless to say, figures are expected to be worse for the second quarter.
Another strong economic indicator is the jobless rate. As travel, tourism, leisure and entertainment came to a standstill, redundancies surged. Government intervention and fiscal stimuli, which took place around the globe, helped to partially mitigate some of these but not eradicate them.
The jobless rate in the US now stands at around 14.7 per cent. In the euro area it is just below the 7.5 per cent mark while in Malta it stands at around four per cent.
Simply due to the economic chain, downturns were also (or could still be) experienced in other industries that are perhaps not perceived as in the direct line of fire for a health crisis. An example are the banking and construction industries – as the risk of bad loans increases and return on capital employed (ROE) projections for investors falter.
Investment markets obviously also reacted strongly to the outbreak. The S&P 500 index fell by around 34 per cent in just over a month between the highest point pre-COVID registered on February 19 (3,386.15) and the lowest point registered on March 23 (2,237.40), to then register a 37 per cent recovery from this lowest point to where it stands today (3,060.60 at time of writing).
Investment markets obviously also reacted strongly to the outbreak
Despite the fact that nobody knows what the future holds in store, and therefore whether the March 23 data is the lowest that we will experience in this pandemic, this drastic drop in investment market levels has so far proved to be an opportunity for those investors who had the courage, financial savviness and financial ability to enter the market at such a low point – something that has been experienced in previous crises.
The figures I have quoted so far are all history, but we are definitely not out of the woods yet as uncertainty remains high.
Markets tend to precede situations that are likely to materialise in the eyes of investors. The partial recovery experienced since March suggests that investors are confident that the worst is now behind us and that the situation in the months and years to come will be better than it is currently. In simpler terms, the market reaction seems to suggest that a higher probability of occurrence is attributed to the positive scenarios outlined at the beginning of this article.
As a matter of fact, the epicentre of the pandemic has shifted from Europe and the US alike, and the situation seems to be under control. The improving situation may suggest that the likelihood of an even worse second wave materialising is remote and, therefore, the market sentiment is that no further severe lockdowns will be required and that businesses and the global economy alike are now in for a rebound, as economic activity picks up, together with rehiring of employees.
The risk in all this is that a strong second wave does actually hit us and that new restrictions will have to be put in place to contain the spread. Should this occur, the negative impact on economies and the investment markets could be stronger than witnessed so far, and the potential recovery from this wave much slower for a simple ‘once bitten, twice shy’ reason, and because of central governments and central banks running out of options.
The reality is that, despite the volatility and uncertainty, numbers are now starting to look better, particularly from a financial aspect. The global effort being made to try to find a cure to this virus in the shortest time possible is also providing some comfort and an improved outlook.
What if the times we are currently living in will provide us with the benchmark to compare to in other financial crises we will be facing in our lifetime?
This article was prepared by David Baldacchino, an investment adviser at Jesmond Mizzi Financial Advisors Ltd. The article does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA and is a member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company and their clients, are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For more information, contact Jesmond Mizzi Financial Advisors Ltd of 67, Level 3, South Street, Valletta, on 2122 4410, or e-mail David.baldacchino @jesmondmizzi.com.
www.jesmondmizzi.com
David Baldacchino, investment adviser